High Inflation, High Interest Rates, High Oil Prices, High Exchange Rates... KOSPI Breaks Through Glass Ceiling

KOSPI Breaks Yearly Low, 2500 Level Also at Risk
Unable to Overcome Inflation Impact
Focus on June 16 US FOMC Outcome

On the 13th, as the KOSPI index started in a downward trend and hit a new intraday low, dealers were working in the Hana Bank dealing room in Euljiro, Seoul. On that day, the KOSPI opened at 2,550.21, down 45.66 points (1.76%). The won-dollar exchange rate started at 1,280.0 won, up 11.1 won. Photo by Moon Honam munonam@

[Asia Economy Reporter Junho Hwang] On the 13th, the KOSPI broke through its fragile bottom. As the "hope for inflation peak-out" turned into false hope, investment sentiment toward risk assets rapidly froze, pushing the index to a new yearly low. Despite forecasts that the 2500 level could hold, the atmosphere lacks conviction. With the possibility of a giant step (75bp hike) emerging at the Federal Open Market Committee (FOMC) meeting on the 16th, investor sentiment has retreated significantly.

At 9:50 a.m. on the 13th, the KOSPI plunged 2.94% to 2519.53. This is more than 30 points lower than this year's lowest point of 2550.08 (May 13). Samsung Electronics, the undisputed market leader, also hit a 52-week low, falling to 62,500 KRW.

This is the result of expectations for an inflation peak-out turning into concerns. Recently, positive outlooks on inflation pushed the KOSPI up to 2685.99 (May 31). However, as signals emerged that the upper limit of the inflation rise has not yet been controlled, the market now has to consider the possibility of significant tightening. Ji-young Han, a researcher at Kiwoom Securities, suggested a KOSPI bottom of 2500 this week, analyzing, "With the sharp rise in the US Consumer Price Index (CPI) in May (8.6%, expected 8.3%), anxiety about inflation has intensified, making it difficult to enter the Federal Reserve's control range anytime soon."

Major players holding the key to supply and demand are withdrawing from the stock market. Foreign investors, who started net selling from the beginning of the session, had net sold 179.7 billion KRW as of 10:16 a.m. Even institutions, which seemed to defend the index with net buying early in the session, turned to net selling of 95.5 billion KRW.

On the 13th, as the KOSPI index started in a downward trend and hit a new intraday low, dealers were working in the Hana Bank dealing room in Euljiro, Seoul. On that day, the KOSPI opened at 2,550.21, down 45.66 points (1.76%). The won-dollar exchange rate started at 1,280.0 won, up 11.1 won. Photo by Moon Honam munonam@

Besides high inflation, high oil prices, high interest rates, and a strong dollar are all negative factors for the stock market. On the 10th (local time), the yields on the US 2-year and 10-year Treasury bonds closed at 3.06% (up 41.1 basis points from the previous week) and 3.16% (up 22.2 basis points), respectively. As interest rates rose into the 3% range, the dollar index increased by 2% from the previous week to 104.15. Mocking these economic indicators, international oil prices, one of the main causes of inflation, have soared well above $120 per barrel.

The situation in China, another economic powerhouse, is also precarious. Hyun-ki Chae, a researcher at Cape Investment & Securities, cited China as a variable and lowered the bottom forecast to 2500. He said, "Although city lockdowns due to COVID-19 were lifted at the beginning of this month, re-lockdowns are expected in less than two weeks," adding, "Although the May export growth rate exceeded expectations at an annualized 16.9%, it may be a temporary figure." China's re-lockdowns worsen economic indicators and supply chain disruptions, which in turn intensify inflationary pressures.

Predictions that the intensity of interest rate hikes, the inflation "firefighter," could increase are gaining traction. At the FOMC meeting in the early hours of the 16th, even if a 50bp hike is implemented as the FedWatch forecast (96.4%) suggests, attention must be paid to the revised dot plot and Fed officials' views on the economic outlook. Following the May CPI release, Barclays and Jefferies have revised their forecasts to a 75bp hike.

However, Kyung-min Lee, a researcher at Daishin Securities, analyzed, "It can be seen that fear psychology has upgraded beyond simple anxiety, and conversely, this means that the variables that stimulated fear may not materialize in the short term, allowing for a possible turnaround in sentiment." He explained that the KOSPI earnings outlook is steadily being revised upward, and the US core CPI has recorded a slowdown for two consecutive months, making this an opportune time for contrarian investment strategies.

This content was produced with the assistance of AI translation services.